Dealing with the taxman

HMRC faces calls for greater governance after £10.9bn of tax is written off in
a year.

The public are furious that some of Britain’s biggest companies appear to have done deals with HM Revenue and Customs that have allegedly cut billions of pounds from their tax bills.Photo: PSL Images / Alamy

On the weekend before Christmas, most people have a different reason for taking to the high street than outrage over Vodafone’s tax bill. But, whatever you think of their methods, the protesters from UK Uncut have not entirely misjudged the public mood.

They are furious that, in an age of austerity, some of Britain’s biggest companies appear to have done deals with HM Revenue and Customs that have allegedly cut billions of pounds from their tax bills. True or not, it is a theme that will resonate this week when the Public Accounts Committee (PAC) publishes a damning report into Britain’s tax office.

Tuesday’s report into how HMRC handles corporate tax disputes follows some blistering dust-ups between the MPs on the committee, chaired by Labour MP Margaret Hodge, and the nation’s senior tax officials. Some would say the politicians have already claimed a prize scalp, with the exit of David Hartnett, HMRC’s permanent secretary for tax.

Hartnett, who is 61 in February, let it be known earlier this month that he would be retiring. HMRC insists that was always the plan. But it is Hartnett who was accused of lying to a parliamentary committee over his role in a tax deal for Goldman Sachs that, due to an admitted “mistake”, saw the US investment bank reduce its tax bill by at least £10m. It was Hartnett too, who was grilled over a settlement with Vodafone that saw the telecoms group pay £1.25bn in tax when some claim £6bn, or even more, was due.

The Goldman and Vodafone cases share as many differences as similarities. But they will underpin a PAC report likely to call for significant changes to the governance of an organisation that has admitted writing off £10.9bn of tax due in a single year – more than the annual budget of the Home Office. The MPs are also expected to call for major surgery to a system that allows senior officials, such as Hartnett, to cut deals ostensibly “solo” and to criticise the lack of qualified tax experts at the top of HMRC. New chief executive Lin Homer – the current permanent secretary at the transport department – is a lawyer.

During the three evidence sessions in October and November, it emerged that at least two more undisclosed companies have struck deals similar to those by Goldman and Vodafone. The report will trigger a National Audit Office investigation, led by a judge, which could look into up to 10 large corporate tax deals.

The PAC findings are also likely to inflame the debate over whether Parliament should be allowed to scrutinise settlements between HMRC and big companies – a move that would be highly controversial.

That details of the Goldman deal became public is largely due to whistleblower Osita Mba, a solicitor at the HMRC. He now faces an internal investigation. His latest claim is that HMRC waived “£20m in rough figures” owed by Goldman and not, as Hartnett claimed, an amount “smaller than £10m”. HMRC denies Mba’s claims.

Ahead of the report, Hodge would only comment on HMRC’s treatment of Mba, whose whistleblower status is protected by legislation.

Noting he had helped the committee uncover “systemic” problems in HMRC’s dealings with large corporations, she told The Sunday Telegraph: “A lot of our evidence is based on his evidence. It would be very wrong if, as a whistleblower, he was not protected by the legislation.”

The Goldman deal turned on bankers’ bonuses that were paid through an offshore company in the British Virgin Islands. While 21 firms settled similar cases, Goldman held out over an alleged £30m tax bill, claiming HMRC had made a technical error by assessing its UK company rather than the offshore one that paid the bonuses. The tax loophole was eventually closed by Gordon Brown.

The affair proved deeply embarrassing for Hartnett. He initially told the Treasury Select Committee on September 12: “I do not deal with Goldman’s tax affairs.” A leaked memo subsequently emerged showing he had, in Hodge’s words, “shaken hands on a deal on their tax affairs”. “It seems to me you lied,” said Hodge during the parliamentary hearings referring to his comments to the committee, adding: “It appears that £10m was lost to the taxpayer because of a deal you did with Goldman Sachs…We were ripped off.”

The Vodafone settlement followed a long-running dispute over tax relating to the company’s takeover of Germany’s Mannesman. It centred on interpretation of the controlled foreign companies rules, designed to prevent multi-nationals domiciled in Britain from avoiding UK tax by artificially diverting profits to lower tax jurisdictions. While Hartnett struck a deal at £1.25bn, there are allegations that Vodafone owed as much as £8bn – claims that are given short shrift by the company. “Vodafone has never received a tax bill for £8bn or for the more commonly misquoted figure of £6bn,” a spokesman says. He adds the company has also never “been ‘let off’ any such amount”.

John Whiting, the Chartered Institute of Taxation’s policy director, says the difficulty is that no outsider can judge whether Hartnett struck a good deal or not. He adds: “What I do know is that no one at the Revenue would allow a company with a £6bn bill off with just £1.25bn.”

Equally, letting Parliament scrutinise such deals would be fraught with controversy. “Taxpayer privacy still remains quite a sacred cow,” he says.

As became evident at the committee hearings, MPs remain suspicious of the relationship between Hartnett and large companies. When it was said he did not take “any lavish hospitality”, Hodge retorted: “107 lunches is quite a lot”.

“The problem,” she said at the hearing, “is that David Hartnett’s position is very different from that of other people, other ministers and other permanent secretaries, because the decisions he takes are shrouded in secrecy.”

She added that it “sticks in my gullet” that, while poor people are hounded over tax errors, “when you are talking about the Vodafones or the Goldman Sachses… we have to come to a deal and it does not matter if £10m goes missing.”

According to HMRC, none of this accelerated Hartnett’s departure. A spokesman insists: “He has agreed to stay on to support the new CEO as she settles in.” Her in-tray already looks pretty full.